Medicare Advantage was supposed to realize cost savings by shifting government healthcare spending from a “fee-for-service” model to a capitated managed care approach. More than 17 million people are enrolled in Medicare Advantage plans -- about a third of those eligible for Medicare.

The capitation payments to private insurers are based, in part, on the enrollees’ health risks. Payments to Medicare Advantage plans are influenced by “risk scores” that take into account differences in patients’ medical diagnoses and health outcomes. The sicker the patient, the higher the “risk score” assigned. For example, a depression diagnosis that is reclassified as a “major” depression would receive a higher risk score. Higher risk scores, in turn, generate increased risk adjustment payments by the federal government to the Medicare Advantage insurance plans.

Critics say that risk adjustment and risk scoring are subject to fudging and manipulation, and that Medicare Advantage plans may inflate risk-adjustment payments by claiming their enrollees were treated for diagnoses they do not have or that were less severe. The NBER report suggests that the criticism may be justified – a conclusion further supported by various public whistleblower lawsuits and an investigative story by the Center for Public Integrity.

The authors of the NBER study concluded that patients enrolled in Medicare Advantage plans receive risk scores that are 6 percent to 16 percent higher than their score would have been had they stayed enrolled in Medicare’s traditional fee-for-service program. That means more risk adjustment payments flowing to the Medicare Advantage insurance plans.

The NBER research suggests that something is amiss. The most suggestive evidence comes from looking at the reported health status of consumers at age 64 and again at age 65. The authors calculated risk scores before and after the individuals enrolled in Medicare, some choosing traditional Medicare, others going into Medicare Advantage plans.

The researchers observed that, compared to the group in traditional Medicare, individuals who enroll in Medicare Advantage at age 65 are reported by the plans to have dramatically worse health once they enroll in a Medicare Advantage plan at age 65 than they had the day before their 65th birthday. This was true even though those same beneficiaries at age 64 were “unconditionally healthier” than those who enrolled in Medicare fee-for-service. This raises serious questions because it is in the insurance plans’ financial interest to portray these patients as being far sicker than they actually are.

NBER’s findings are consistent with today’s story from the Center for Public Integrity (CPI), a nonprofit, investigative news organization. CPI reported that a government audit of UnitedHealth Group’s subsidiary PacifiCare found numerous problems that resulted in overpayments to Medicare Advantage plans. For instance, the story said, one in five medical conditions of Medicare Advantage patients could not be confirmed, and most of the errors triggered higher payments. PacifiCare has disputed the audit’s findings.

Whistleblower lawsuits alleging that risk scores (and the underlying patient diagnoses) are wrongly inflated are beginning to surface. A whistleblower lawsuit against Humana, one of the largest Medicare Advantage plan sponsors, alleges that the mega-insurer manipulated – or “upcoded” – diagnosis codes to inflate the plan’s risk scores.

For example, the whistleblower alleged that Humana reported that patients with diabetes diagnoses had more severe diabetes with complications than what was supported by those patients’ medical records. If true, upcoding would have inflated Humana’s risk scores and hence risk adjustment payments.

Because qui tam whistleblower suits are filed “under seal” – i.e., they are kept confidential by the court – the number of cases alleging risk adjustment fraud is not known. It is likely that many more Medicare Advantage plans are named as defendants in other whistleblower cases as well.

For seniors, Medicare Advantage plans are attractive because of their lower out-of-pocket costs and broader range of coverage options, such as hearing, dental and vision. But based on the NBER report and whistleblower lawsuits, it seems that it is Medicare Advantage that needs emergency care.

I am a partner at Phillips & Cohen LLP, the nation’s most successful law firm representing US and international whistleblowers, and have been named one of Lawdragon's 500 Leading Lawyers in America. My firm's cases have recovered over $12.3 billion in civil settlements ...